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Are the Forbes Franchise Valuations Worth Your Time?

Image result for accounting terms

When considering the Forbes financial valuations, accounting is important.

Recently, Forbes came out with their franchise valuations based on numbers from the 2017 season. The Pirates ranked #18 in baseball with a $1.26 billion valuation and possessed an estimated $35 million Operating Income. These are two values fans will hang their hats on when they want to complain about the Pirates spending habits, but I have several problems with this line of thinking:

Forbes is Just Guessing

First, let me say, I like Forbes. They write about business, I enjoy business, and I enjoy their content. I ?m sure they work hard, but that does not mean they have enough information to properly value a team, and this goes for all teams, not just the Pirates. Their write up on the process states that to come up with their totals they ?speak with sports bankers, team executives and industry analysts, ? as well as ?review team documents and stadium leases to the extent [they] can get [their] hands on them. ? This wording isn ?t on accident.

As many fans know ?and are frustrated by ?sports teams are private entities. This means that they are not publicly traded and are not required to share their financials publicly, and this is evident as per the CBA. The agreed upon ?Confidentiality Agreement Attachment 14 or Page 193 ?stipulates the following:

  • The MLBPA acknowledges financial information is confidential, and they agree to keep it as such.
  • Financial documents can only be used to determine compliance with the ?Basic Agreement ? and nothing else.
  • Financials are only available to those who are responsible for determining compliance, such as attorneys and their staff, the MLBPA, outside experts (accountants, economists, etc.), players, and agents.
  • Appropriate procedures must be determined and kept regarding the use and control of all financials.

This is only a summary, as the actual agreement is quite weighty, but it ?s clear the document makes no mistake that financials can only be used for certain purposes. This is why the leaked financials of the Pirates ?and others ?caused such an uproar in 2010; teams don ?t want the public to have this information. Is this partly because they don ?t want fans, media, or other concerned parties to know just what their financial standings truly are? That ?s probably part of it, but that ?s currently within their rights.

As for Forbes, calling it ?guessing ? may be a bit harsh, but personally, when making a strict value judgement on the Pirates financial standing ?or anything really ?I want the whole picture. Financial statements can tell you that, but Forbes probably can ?t. Even if their valuations are somewhat close, it ?s not as if they mean anything.

Team Value Means Nothing

Many upset fans will point to the $1.26 billion valuation as if it means something; as if the Pirates ?or better yet, Bob Nutting ?have $1.26 billion in the bank that they can freely spend as they see fit. This is simply not what franchise value means. Compare this to the value of personal assets that are more relatable, like a home or 401(k). If the value of these go up or down based on the market, it doesn ?t mean the owner has more or less money to spend out of pocket, it just means the asset is worth more or less when it comes time to liquidate. On a not completely unrelated note ?to take out equity of an asset like this to cover personal expenses would be bad personal finance and the same is true for the Pirates.

Recent proof of the meaningfulness of these values can come from the sale of the Marlins. In last season ?s iteration of this exercise, Forbes valued the Marlins at $940 million in April 2017; they sold for $1.2 billion in September 2017.

It ?s too simplified to say these franchise values are ?made up ?; Forbes explains their process, and it is mostly solid. The validity of their figures has already been brought into question, but to a greater point, the value really doesn ?t matter until it comes time to sell. At that time, the value is basically what a purchasing group is willing to pay for it, or frankly, what MLB would like it to sell for.

Final selling prices will largely depend on ?goodwill, ? an accounting term that states while there are many aspects of a business that have value, there are also aspects to a business that can ?t be valued. In baseball, this could be stadium location, fan base, or recent history of success, and this is something Forbes obviously can ?t measure. When it comes time to sell, how much ?or how little ?goodwill the team is perceived of having will affect the selling price, and as we ?ve seen the Marlins, even the teams that are considered the worst off are still extremely valuable in a business sense.

Sure, the Pirates may be roughly worth $1.26 billion, and they may not. Honestly, it means very little when it comes to attacking or defending how the Pirates run their business.

Operating Income is Different from Net Income

Finally, even if fans don ?t cite the franchise value, many will certainly bring up the $35 million Operating Income and suggest the Pirates had that much more to spend on payroll but chose to pocket it instead. This isn ?t necessarily true, either.

Assuming this amount is representative ?and as stated above, it may not be ?the importance of Operating Income versus Net Income must be stressed.

It is true that many companies calculate Operating Income differently ?Forbes cites its calculation as ?earnings before interest, taxes, depreciation and amortization, ? (or EBITDA) whereas depreciation and amortization is often factored in for other calculations. Either way, Operating Income is only looking at business operations, while Net Income takes all accounting and financing decisions into account, and it ?s this total that will be rolled into Retained Earnings at year-end (or ?pocketed, ? if you want to use that misnomer). No one financial indicator is going to paint the entire picture of a business; many factors need considered when determining financial health. The goal for this exercise, however, is not to determine the financial stability of the Pittsburgh Pirates.

While these differences are important, try not to get lost in the accounting jargon. The main point is that whatever the Pirates truly made in relation to the Forbes $35 million is going to be less. Forbes acknowledges their calculation doesn ?t include interest, taxes, depreciation, and amortization. These are all expenses the Pirates would have to pay and recognize, which obviously means that amount is too high. I have no idea how much of these respective expenses a baseball team would have to identify, but my guess is it would be a sizeable chunk of the $35 million.

The bottom line (pun intended) is that it ?s disingenuous to say definitively that the Pirates made $35 million in 2017, as that theoretical figure would be much less with everything accounted for.


My goal here is not to absolve the Pirates of anything ?as I said, these same arguments can and should be made for every team ?rather, it ?s to educate on the business side of baseball and to factor that important aspect into the argument. In my opinion, the Forbes numbers are interesting and a good reference point, but to base entire stances on them is somewhat foolhardy. These arguments are largely unsound or incomplete from a financial perspective, and while I ?m a Pirates fan, sound reasoning and financial theory are where my allegiances truly lie.

Ethan is a Pirates contributor to The Point of Pittsburgh. An Accountant by trade, Ethan is passionate about the business of sports and won't apologize for enjoying it more than the actual games. He's a believer in analytics, hasn't played a game since little league, and can be contacted via Twitter @EthanHullihen

8 Comments on Are the Forbes Franchise Valuations Worth Your Time?

  1. Harry Schade // May 3, 2018 at 8:46 AM // Reply

    Well done…a light of reasoning shines for frustrated fans who may not understand the short and long term responsibilities of running a business. I ?m not an apologist either.

  2. Daquido Bazzini // May 3, 2018 at 2:59 PM // Reply

    Ethan – You are doing a bang up job for the Nutting Regime.
    However, I don’t think it’s going to fly with the common fan.
    It looks like you’re an accountant (as is my wife).
    As you know, accounting numbers can be fired out in many different directions.

    If you’re not working for Nutting, I would suggest you apply.
    Perhaps you’ll get an added bonus for your work.
    As for Forbes….If they were saying that Bob Nutting’s books were hanging by a thread, you would agree.
    Because they talk in terms of $35 mil in profit, Forbes is suddenly in question.

    Forbes hasn’t seen the books ….And neither have you.
    But I have to believe they have a pretty good idea what they’re talking about.
    The name Nutting doesn’t keep attached to Pirate ownership since latter ’96 because they are losing money.
    Granted….They deserve to make money.
    But they also owe it to paying Pirate fans to put their best foot forward in fielding a possible championship team.
    If that’s not feasible, they should cash out.
    When they do that, they will make massive money….But apparently not as massive as what they’re making now.

  3. Bob Stover // May 3, 2018 at 3:22 PM // Reply

    I have make one minor point of exception to the story that was posted on Business of Baseball by Ethan Hullihen. Depreciation is not an actual expense to any corporation. It is a tax mechanism by which the taxable income is decreased by pro-rating a portion of the acquisition costs of buildings, machines and equipment. Depending on what the asset is, there are tax rules for how long a period of time a business may take to fully depreciate the asset. However, whatever that item actually costs to buy or service, is incurred only in the year in which it is purchased, unless of course it is a large mortgaged item, or expensive financed or leased objects such as motor vehicles and office equipment. It is however, a negligible amount in most years, and doesn’t really affect retained earnings except on the positive side.

    • Ethan Hullihen // May 3, 2018 at 4:51 PM // Reply

      Bob, thanks for reading and commenting.

      I hope I’m not speaking out of turn, but I mostly can only speak to what I have experience with. Yes, Depreciation is a “noncash” expense, and cash only goes out when an asset is originally bought. My company does not do Cashflow Statements, so I’m not sure how depreciation is treated there. Also, in my experience, Depreciation Expense is on the I/S, which affects Net Income, which was my main point. We shouldn’t cite Operating Income as a teams bottom line, when there are more expenses/line items that will decrease the OI, cash or not.

  4. PirateGold // May 3, 2018 at 5:20 PM // Reply

    I find it amazing that a segment of the fan base continues to attempt to downplay the info and estimates that Forbes reports. The best information we have about how close Forbes is to actual numbers is from the leaked documents. I posted the following multiple times at the Only Bucs board in the past. I had to post it multiple times because multiple people continued to incorrectly state that Forbes was ‘way off’. The opposite is true – Forbes has been quite accurate regarding the Pirates when the real data is known.

    The leaked documents from Deadspin compared to Forbes info from the same years show the following:
    Total Revenue
    2008 leaked document – $146 million
    Forbes 2008 estimate – $144 million
    2007 leaked document – $139 million
    Forbes 2007 estimate – $139 million

    Operating Income (EBITDA) – combined in 2007 and 2008, Forbes actually UNDERESTIMATED the Pirates operating income. They didn’t grossly overstate it.
    2008 leaked document – $21.8 million
    Forbes 2008 estimate – $15.9 million
    2007 leaked document – $16.2 million
    Forbes 2007 estimate – $17.6 million

    Net Income
    2008 leaked document – $14.4 million
    2007 leaked document – $15.0 million

    You can guys can make your own conclusions. Mine are pretty simple – if the Pirates had a net income of ~$15 million when operating income was in range of $20 million, then their net income likely went up if their operating income went up to $35 million, as Forbes estimates.

    To Ethan’s point about EBITDA and net income, the Pirates net income was 66% of EBITDA in 2008 and nearly 93% in 2007. Taking the lower of the two percentages, that’d be about $23 million in net profit in 2017 based on an estimated $35 million EBITDA figure.

    I’ve dealt with private equity acquisitions (on the marketing side – I’m far from an accountant) and I can say without question if our accountants and industry experts could accurately judge the revenue and EBITDA of privately held companies we were looking to acquire the way Forbes has done in the past, then the company I work for (which already does quite well) would be knocking it out of the park. Sure, you can state Forbes is guessing. But they have guessed very well.

    • Ethan Hullihen // May 3, 2018 at 5:42 PM // Reply

      You bring up good points that I did consider when writing; out of curiosity, I did compare the leaked financials to Forbes from those years and saw what you saw–amounts that were quite similar. I didn’t sample all the teams, which is one reason why I decided to push it aside, but there are other reasons as well.

      Personally, I’m a stickler for exactness, and while I recognize that a few million when you’re dealing with amounts this large aren’t material, I still would prefer the real thing. Also, ten years is a long time, and maybe something has changed that would make coming to these conclusions more difficult than before, but who knows.

      I didn’t want to completely discredit Forbes, especially after I saw this, but the main reason why continued on is I’m not sure the actual amounts change my point too much. Obviously my first point would be completely moot, but would the final two change that much? My point of franchise value meaning nothing doesn’t change–just because the Pirates franchise value is “x” doesn’t affect their spending power one way or another. Also, even if the $35M was correct, my point of the Net Income being smaller still stands, but at that point–as you point out–the question is how much smaller would the Net Income actually be and can we still figure it out close enough to make a proper value judgment.

      I appreciate you reading and commenting, and your points are certainly not without merit.

      • PirateGold // May 3, 2018 at 7:26 PM // Reply

        In the absence of actual data from the last 10 years, my bias is to believe Forbes continues to be close with their estimates based on the two real data points that we have. I certainly could be wrong about that.

        What an owner does because the value of the franchise has gone up is, to some extent, one of personal preference IMHO. As you noted in the main part of your article ‘to take out equity of an asset like this to cover personal expenses would be bad personal finance’. That’s 100% true. At the same time, it’s also 100% true that there’s a section of the fan base (myself included) that, if they had $1 billion, would consider it a worthy cause to lose half of that spending like Montgomery Brewster trying to get another World Series title for the Pirates. At the risk of speaking for a lot of people, I’d say that’s how a lot of fans view Nutting – he’s too risk averse in spite of having an enormous parachute to soften whatever losses he might face if he were to overspend and come up short. I understand that spending fast and free isn’t 100% up to Nutting as there are minority partners involved. But I hope you get my point.

        • Ethan Hullihen // May 3, 2018 at 8:51 PM // Reply

          See, you said “if they had $1 billion.” I’m not sure if that was intentional, but I’ll parse words here. I don’t see it has “having” a billion dollars; rather, he owns an asset worth a billion dollars. Some fans may not see a difference, but there is one. As I said in the article, just because that’s what the asset is worth, that doesn’t mean that’s what is available to spend at any given moment. The same can be said with Nutting’s personal net worth–very little of it is liquid I would assume, and I’m sure a lot of it is tied in the Pirates anyway. That’s not even factoring in the LLC portion of it, as you pointed out as well.

          Also, I view all this from a different point-of-view. Some readers may have trouble/refuse to believe this, but I honestly don’t care about the Pirates’ finances and how they choose to use them. When I say this, I obviously care in that I’m passionate about the topic of the finances of sports and find it interesting and enjoyable, but it doesn’t actually affect me. If anything, I agree with the ideology of small-market economics, and it’s how I would run my team, which is why I would defend the Pirates’ actions at all. I’ve always valued being an impartial judge over a rapid fan, so I find more value in trying to figure why the Pirates do what they do and explaining why, rather than espouse many opinions on how I think they should operate.

          I view Nutting as a businessman, and business owners have the right to operate their businesses as they see fit. It could probably be argued that short term loss could equal long term gain, but businesses don’t budget to lose money, and I don’t begrudge them that fact. Also, I’m not one to spend someone else’s money, and I have no say in how the money is spent anyway, so what does it matter? I just love baseball and love the Pirates, so I watch and follow them because I enjoy it. I just had my first child three months ago; I have more important things to worry about, not whether the Pirates forgoing MLB free agency is worse than the Dodgers signing one player.

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